DIXIT, C.J. - In this consolidated reference under section 66(1) of the Indian Income-tax Act, 1922, at the instance of the assessee, the Central India Insurance Co. Ltd., Indore, a common question of law arising out of the Income-tax Appellate Tribunals order dismissing the assessees three appeals arising out of the assessment proceedings for the assessment years 1956-57, 1957-58 and 1958-59 has been submitted for decision. That question is :
'Whether, on the facts and circumstances of the case, the provision for doubtful debts made by the assessee through a profit and loss appropriation account in each of the accounting years 1955, 1956 and 1957 are allowable deductions in computing the profits and gains of the general insurance business of the assessee under of Income-tax Act, 1922 ?'
The material facts are that the previous years of the aforesaid assessment years are the calendar years 1955, 1956 and 1957. In those years, the assessee-company carried on the business of insurance other than life insurance. The assessee did not always actually receive the premia on all the policies issued by it. But the practice of the assessee was to treat as received the premia on all policies and to show the amount not received in any case as a debt due from the policyholder. For each of the assessment years 1956-57, 1957-58 and 1958-59, the assessee claimed an allowance of Rs. 25,000 in the computation of its income. This amount of Rs. 25,000 was said to be a provision made each year in respect of bad and doubtful debts because of non-receipt of premium. The Income-tax Officer rejected the claim of the assessee taking the view that the mercantile system followed by the assessee did not countenance a contingent liability and provision of such reserve is not a proper charge for the type of business carried on by the assessee and further the provision of Rs. 25,000 for bad debts could not be regarded as expenses. The Appellate Assistant Commissioner upheld the orders of the Income-tax officer rejecting the assessees claim by observing, inter alia, that the amount had not been debited to the profit and loss appropriation account, and that under rule 6 of the Rules for the computation of the profits and gains of insurance business (hereinafter called the Rules), contained in the Schedule to the Indian Income-tax Act, 1922, as the profits had to be computed on the basis of the balance of the profits disclosed by the annual accounts the question of further allowance as claimed by the assessee did not arise.
The Tribunal, after examining the annual reports of the assessee-company for 1955, 1956 and 1957, found that the amount of Rs. 25,000, in respect of which an allowance in the computation of income for each assessment year was made, was not treated by the assessee itself as an expenditure of business but was regarded only as an application of its profits; that the balance of profits of the assessee was Rs. 66,473 for 1955, Rs, 5,715 for 1956, and nil for 1957; and that as the provisions in question were not included as expenditure in reaching the said balance, there could be no question under rule 6 of the Rules of any adjustment of the balance of the profits.
The answer to the question submitted in this reference depends on the meaning and effect of section 10(7) of the Act which is as follows :-
'Notwithstanding anything to the contrary contained in section 8, 9, 10, 12 or 18, the profits and gains of any business of insurance and the tax payable thereon shall be computed in accordance with the rules contained in the Schedule to this Act.'
The plain meaning of this provision is that in the case of any business of insurance, the operation of section 8, 9, 10, 12 and 18 in the computation of the profits of the business is excluded to the extent to which the provisions of those section are inconsistent with the Rules and the profits and gains of insurance business from all source are to be computed artificially in accordance with the Rules. Rule 6 of the Rules is as follows :
'The profits and gains of any business of insurance other than life insurance shall be taken to be the balance of the profits disclosed by the annual accounts, copies of which are required under the Insurance Act, 1938, to be furnished to the Controller of Insurance after adjusting such balance so as to exclude from it any expenditure other than expenditure which may under the provisions of section 10 of this Act be allowed for in computing the profits and gains of a business. Profits and losses on the realisation of investments and depreciation and appreciation of the value of investments shall be dealt with as provided in rule 3 for the business of life insurance.'
According to this rule, the Income-tax Officer has to take the profits disclosed by the annual accounts as the basis and make adjustments in the manner prescribed by the rule in the said amount of disclosed profits. The mode of adjustment laid down by the rule is to consider what items of expenditure have been included by the assessee in arriving at the profits disclosed in its annual accounts, and if it is found that any such item of expenditure is one other than the expenditure permissible under section 10 of the Act, then that expenditure or expense is disallowed and added back to the profits disclosed by the assessee. The rule also deals with the adjustments in respect of profits and losses on the realisation of investments and depreciation and appreciation of the value of investments. But we are not concerned with those adjustments. Rule 6 thus provides for an adjustment of the balance of profits so as to exclude from it expenses which are not permissible. The effect of that rule is that the assessee cannot claim an expenditure which it has not included in arriving at the balance of profits disclosed by it in the annual accounts, and the Income-tax Officer cannot consider and allow such expenditure.
Now, as has been found by the Tribunal and as is also evident from the annual accounts of the assessee for the years 1955, 1956, and 1957 in no year the amount of allowance claimed, namely, Rs. 25,000, was included as an expenditure in arriving at the balance of the profits disclosed by the annual accounts. The amount was not debited in any year to the profit and loss account but to the profit and loss appropriation account. Thus the amount was not included by the assessee in arriving at the balance disclosed in its annual accounts. The provision for Rs. 25,000 as reserve for doubtful debts was no doubt made in the profit and loss appropriation account of each year. But all the heads in the appropriation accounts are heads for disbursement of profits after the earning of the profits. Thus in no year the assessee itself treated the amount of Rs. 25,000 in respect of which it claimed allowance in the computation of its income, as an expenditure on business. The amount was regarded only as an application of its profits. It follows, therefore, that as in no year Rs. 25,000 on account of 'bad and doubtful debts', was included by the assessee as an item of expenditure in arriving at the balance disclosed in the annual accounts for that year, the question of adjustment of the profits disclosed in the annual accounts for any year according to rule 6 cannot arise. The Tribunal, and the income-tax authorities were, therefore, right in rejecting the assessees claim for an allowance of Rs. 25,000 in each year in the computation of its income.
The view taken by us finds support in the decision of the Bombay High Court in Commissioner of Income-tax v. Union Co-operative Insurance Society Ltd. That was a case in which the question arose whether certain amounts paid by a company, carrying on general insurance business, to policyholders by way of bonus could be regarded as an admissible deduction for the purpose of computation of its taxable income for the relevant assessment years. The Bombay High Court held that under the provisions of section 10(7) of the Indian Income-tax Act, 1922, and the rules contained in Schedule 1 of the Act, in computing the profits and gains of the company, items of expenditure included by the assessee may be disallowed by the Income-tax Officer and added back to the profits if they are not allowable under section 10 of the Act; and that there is no provision enabling the assessee to claim expenditure not included by it in arriving at its profits or for the Income-tax Officer to allow such expenditure. It was further held that the balance carried forward only shows how much of profits remain after disbursements from it and cannot be regarded as 'profits' for purposes of adjustments under rule 6 and that as the sums claimed by the assessee company were not debited in its revenue account, it must be taken that the assessee-company were not debited in its revenue account, it must be taken that the assessee itself had regarded the payments as application of profits and not as expenditure; and that, consequently, the deduction claimed could not be allowed. The case before us is similar to the case the Bombay High Court had to consider.
For these reasons, our answer to the question referred to us for decision is in the negative. The assessee shall pay the costs of this reference. Counsels fee is fixed at Rs. 200. Question answered in the negative.